Financial Risk Management


If you were driving to Moscow in mid Winter you would make sure to have snow chains, a puncture repair kit and blankets in case you get snowed in.

On that tough journey you would automatically think ahead and assess the risks you will be exposed to and prepare the right tools and equipment.

In your business you should assess your exposure to key financial (and other) risks and put systems in pace to mitigate these.

Your financial risks may include:

  • Foreign exchange fluctuations, for example if you produce in Euro but sell in £, then the sterling slide poses a huge risk to your margins. You can get hedging protection from the bank meaning that you sell future sterling inflows at an agreed price, or you can have more flexible contracts called options. However these will not protect you from long-term currency slides.

Often the best risk management systems are the simplest. For example if you have revenues in sterling and all your costs are in euro, consider whether you can transfer some of your costs into sterling by purchasing inputs in the UK.

Or even go for the simplest solution of all, which is, insist on invoicing in euro.

  • Commodity cost risks Is your business impacted by the price of milk powder? Sugar? Cocoa? Oil? Can you purchase ahead or agree a fixed price with your supplier for example with utilities?
  • Debt risk– meaning that if your business goes through a downturn you may no longer be able to sustain your debt, leaving your business vulnerable to failure. You should stress test before you take on debt – i.e. would we be able to handle the debt even if our turnover dropped by say 20% in a recession? What happens at 30%?
  • Interest rate risk – if you borrow at a variable rate and the macroeconomic conditions change the debt may no longer be sustainable.
  • Credit and other counterparty risks including supplier failure risk. Monitor your customer base for financial stability and consider credit insurance.
  • Fraud and embezzlement risk – Make sure that all cash handling, payment and procurement systems are set up to minimize risk. For example the authority to set up a new supplier account and make payments should be split between more than one person. Segregation of duties is critical so that several different people are needed to approve and pay an invoice. Other internal exposures include expense fraud and timesheet distortions. It is in everyone’s interest to have a control environment – i.e. everyone feels the system is fair. It is very demoralizing in a company where some employees believe that others are playing the system.

If any of these issues could potentially damage your business seriously, you should look at putting risk management processes in place to mitigate.

 

This article is written and reproduced with the kind permission by Moira Creedon of Artemis Consulting